The purpose of liability insurance is to protect an insured party against unintentional acts or situations that cause some form of harm to others. Liability insurance takes many forms, and most are optional, but as you’ll see, at least two forms are government mandated.
Keep in mind that liability insurance does not offer any protection against criminal acts. Also, liability insurance policies are very tightly written, so you might need to purchase more than one type of coverage to protect your business from various risks.
Liability Insurance Types
Insurance is a means of sharing risk, and for most policies, you’re expected to provide some level of first dollar coverage. This means your policies likely have a deductible you need to pay in full before the insurance company pays any part of a claim.
The purpose of workers’ compensation insurance is to provide a safety net for workers who are injured on the job. This insurance provides automatic benefits to injured employees and also protects employers from legal action for negligence stemming from such injuries.
Workers’ compensation is not optional, although certain states allow employee-owners or officers of a business to opt out of workers’ compensation. That is, only owners and officers can choose to opt-out; all other employees must be covered.
Workers’ compensation provides injured employees the following:
- Coverage for medical expenses
- Income replacement during periods of temporary or permanent disability
- Funeral and dependent benefits resulting from a loss of life
- Vocational benefits to retrain workers unable to carry out their previous line of work.
Workers’ compensation insurance is not optional. Although it might feel like a costly burden, the coverage protects your business from legal action and protects your employees. You or your business can be subject to severe penalties for not maintaining workers’ compensation insurance for your employees.
General Liability Insurance
This type of insurance provides a level of protection for business owners against civil litigation. For example, a customer could slip and fall in the lobby of your office and file a lawsuit. Business owners can purchase liability coverage in dollar amounts commensurate with the amount of perceived risk.
Product Liability Insurance
This type of insurance protects businesses from financial losses when a product covered by the policy causes an injury or damage. For example, food recalls due to listeria, salmonella, and other bacterial agents can cause significant harm to customers. Just about any other product can spark unintended consequences, such as appliances with faulty wiring, baby cribs that cause injuries, or outdoor clothing with heating elements that cause burns.
Directors’ and Officers’ Liability Insurance
This type of coverage, often referred to as D&O coverage, protects directors and officers of corporations from legal defense costs for acts related to their role of running the company. Just as workers’ compensation only protects employees while working on the job, D&O coverage is limited to acts carried out on the job.
Professional Liability Insurance
Lawyers, accountants, architects, consultants, and many other professionals purchase insurance protection for improperly rendering services, or failing to live up to their professional responsibility. This type of coverage is sometimes referred to as errors and omissions (E&O) insurance.
This insurance doesn’t protect against fraudulent acts, such as a tax adviser knowingly filing an improper income tax return, but the insurance can protect against negligent acts in the line of delivering professional services.
Medical professionals often have a special version of this type of insurance known as malpractice insurance.
Any automobile you or your business owns must have a liability policy. The minimum amount of coverage varies by state, but often the minimum coverages are insufficient to fully protect your business.
If you drive a vehicle without liability insurance, you run the risk of losing your driver’s license; incurring civil penalties; and being personally liable for any property, medical, and legal costs of any car accidents in which you are found at fault.
Automobile liability coverage does not protect the vehicle itself. It reimburses injured parties for harm and property damage caused by the insured vehicle.
Cyber Risk Insurance
If you have even one device connected to the internet, you face the potential risk of your computer being hacked. Although you can purchase internet security software and firewall devices that lessen the risk, no system is completely infallible.
A cyber risk policy might be available under a variety of names, including computer hacking, computer fraud, and data breach coverage.
Personal Umbrella Insurance
All the coverages we’ve discussed thus far are considered primary coverage, meaning the insurance company pays for covered events when warranted. However, in certain cases, litigation could result in judgments that exceed the policy limits of your primary coverage.
It’s a good idea for every business owner, as well as high-net-worth individuals, to purchase personal umbrella insurance. This type of coverage is known as secondary coverage because it doesn’t take effect until the limits of one of your primary policies have been exceeded.
Umbrella insurance is typically purchased in $1 million increments and is usually rather inexpensive, particularly when compared to primary coverage.
Umbrella insurance raises the limits of your primary liability coverage and helps protect your business or personal assets by providing a higher level of coverage than you might be able to afford.
With that said, your umbrella policy might include a clause that requires you to increase your current liability coverage amounts to a higher level than you presently have. In the end though, you’ll have a much greater level of protection.